The business uncertainty that the pandemic has created is unprecedented. Consumer sentiment underpins economic growth and even well-managed businesses are feeling the pressure as that sentiment turns negative.

Banks are no exception. A combination of negative headwinds is beginning to worry regulators about the effects that the economic downturn will have on some banks. The Central Bank report on developments in the financial sector in 2019 highlighted some concerns that need to be addressed.

When the two largest banks, Bank of Valletta and HSBC, announced their half-yearly results a few weeks ago, it was evident that the days of bumper profits were over.

Our larger banks have been reviewing their business models in the light of more intrusive regulation that no longer tolerates activities considered to be high risk. The onset of the pandemic earlier this year has added a new dimension to the financial sector’s distress. The CBM says that some banks may “come under pressure” if the COVID-19 outbreak persists and economic recovery takes longer than expected.

It is becoming evident that the initial projections of the pandemic’s impact on the local economy, made by the government, rating agencies and European Commission, may have been too optimistic. The resurgence of COVID-19 is now a reality and consumer confidence is not recovering as fast as had been predicted when Malta was basking in its short-lived ‘victory’ over the virus.

While the government has announced fiscal support measures to help businesses survive the downturn, it is almost inevitable that some companies will never recover. The government, through the Malta Development Bank, is guaranteeing the finance provided by banks to help businesses afflicted by the economic slump. However, past borrowing that is not being repaid will inevitably lead to higher provisioning that affects banks’ profits.

It is not clear which banks are the main cause of concern for the CBM. Unfortunately, this lack of detail may create a climate of doubt among all depositors who entrust local banks with their savings.

It is therefore essential that all banks that take retail deposits do whatever it takes to communicate with their retail clients on how they are being affected by the pandemic.

The majority of banks are highly liquid because depositors keep depositing more money into their accounts. But the gold standard for healthy banks is their levels of capital that partially affects their solvency. When borrowing clients begin to default on the repayment of their loans, their bank’s capital begins to be eroded. 

The low-interest-rate regime is also hurting banks, especially those that have to deposit their excess liquidity with the ECB at negative interest rates. It is indeed welcome that the ECB has temporarily eased pressure on banks that are in the process of de-risking their business model.

While the three largest banks serve the bulk of the local business community, the smaller banks also need to be considered as safe so that trust in the financial sector will continue to prevail. While the CBM has advised banks to stick to prudent banking practices, more needs to be done to put the minds of depositors of all banks at ease.

Local retail banking is going through a significant transformational phase with electronic delivery channels steadily replacing over-the-counter services. This transformation will imply possible cost-cutting measures, including the closure of branches and reduction of headcount.

Today what matters more is a reassurance that our banks will continue to be solvent.

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